When Xi consolidates his rule throughout the Party Congress this November 18, we should expect him to appoint a new Central Bank chair. The success of Zhou Xiaochan, China’s current monetary authority will be a difficult act to follow. Xiaochan was responsible for eliminating China’s dollar peg, modernized Beijing’s monetary policy tools, ended caps on deposit rates and engineered the yuan’s elevation as a reserve currency asset. What could go wrong going forward?

To begin with, Asia only denominates about 2% of its transactions in yuan. This has strong geopolitical implications evidenced throughout China’s posture in its southern littoral. Until nations across Asia begin trusting China’s foreign policy posture, this will definitively halt Beijing’s progress toward possessing reserve currency status.

Recently, China’s central banking authorities have stepped up control over the yuan’s rise prodding Asian companies throughout Asia that have been hoarding dollars to convert them into yuan. Any surge in yuan denominated deposits should be met with skepticism, until after the Party Congress.

China’s central bank has actively dialed back efforts to make the yuan an easier currency to possess by imposing strict domestic controls. This official policy is charged with managing capital outflows.

Why is this happening?

China’s market fundamentals aren’t showing. From Beijing’s mounting debt spiral and persistent industrial overcapacity to striking out-of-balance housing all suggest that Beijing needs to orchestrate a rising currency. By any measure, China isn’t a market based economy. In fact, China’s capacity led reform has sputtered out, disguising old flaws while creating new ones yet to be acknowledged and managed. Chinese firms have simply carried on expanding, confident of state support. This confidence is misplaced.

China remains a centralized based economy, with diktats actively managing supply-demand relations. This lack of flexibility will generate volatile outcomes. The source of China’s overcapacity is its politicized banking system that directs capital. A nasty affliction of self imposed volatility may be unavoidable.

So what holds the minds of those in the Central Committee?

During the Party Congress, officials want to portray monetary stability to fend off any financial crisis while avoiding trade disputes abroad. What must be immediately balanced is an appreciating yuan to China’s traditional inflationary based economic model which leans heavily on export based manufacturing.

Even still, currently, China is mired in tepid private investment and consumption. By any measure, the boys in Beijing haven’t conjured or transformed China’s fundamentals out from an export based model.